Is an interest rate hike round the corner? Market seems to think so
, ET Bureau|
Updated: Nov 16, 2017, 10.31 AM IST
Mumbai: Derivative instruments in the fixed-income market appear to indicate a tightening rate cycle over the next four quarters, with a key swap gauge rising to its highest in more than five months in lockstep with benchmark sovereign bond yields.
The Overnight Indexed Swaps (OIS) with one-year maturity, where a trader exchanges fixed rate payment for floating rates, climbed to 6.28 per cent this week, a level not seen since June 8.
In essence, OIS is an interest rate derivative used to hedge one’s position against future credit-cost movements either way, with the instrument offering a fixed rate considered less risky than the corresponding interbank gauge.
“The OIS market is currently pricing some probability of a rate hike in the next one year,” said Piyush Wadhwa, head of rates trading at IDFC Bank. “A significant section of the market believes that the rate-cut cycle is over, and there is likely to be an extended pause.”
The OIS is structured such that the floating payment is linked to a daily compound interest investment, for which the usual reference in most markets is the overnight rate. Traders say that it is trading at least five-six basis points higher than the fair value, indicating future northward movement in policy rates.
The one-year OIS closed at 6.27 per cent Wednesday, the highest level in about five months.
The benchmark bond yield closed at 7.02 per cent on Wednesday, three basis points lower than Tuesday, with select long-term investors bottom-fishing Indian debt instruments.
Rate Hike Round the Corner?
The government bond yield climbed to a 14-month high. The yield touched 7.06 per cent on Tuesday. Bond yields and prices move in opposite directions.
“The increase in the OIS rates only suggests that all expectations around rate cuts are likely to be unmet, and that the market needs to adjust for higher yields,” said Sandeep Bagla, associate director, Trust Capital.
“Globally, yields are going up amid unwinding of monetary largesse. India cannot remain immune to it,” said Anindya Banerjee, currency and interest rate analyst at Kotak Securities. “The one-year derivative market (OIS) is probably factoring that amid a slew of other concerns.”
The Overnight Indexed Swaps (OIS) with one-year maturity, where a trader exchanges fixed rate payment for floating rates, climbed to 6.28 per cent this week, a level not seen since June 8.
In essence, OIS is an interest rate derivative used to hedge one’s position against future credit-cost movements either way, with the instrument offering a fixed rate considered less risky than the corresponding interbank gauge.
“The OIS market is currently pricing some probability of a rate hike in the next one year,” said Piyush Wadhwa, head of rates trading at IDFC Bank. “A significant section of the market believes that the rate-cut cycle is over, and there is likely to be an extended pause.”
The OIS is structured such that the floating payment is linked to a daily compound interest investment, for which the usual reference in most markets is the overnight rate. Traders say that it is trading at least five-six basis points higher than the fair value, indicating future northward movement in policy rates.
The one-year OIS closed at 6.27 per cent Wednesday, the highest level in about five months.
The benchmark bond yield closed at 7.02 per cent on Wednesday, three basis points lower than Tuesday, with select long-term investors bottom-fishing Indian debt instruments.
Rate Hike Round the Corner?
The government bond yield climbed to a 14-month high. The yield touched 7.06 per cent on Tuesday. Bond yields and prices move in opposite directions.
“The increase in the OIS rates only suggests that all expectations around rate cuts are likely to be unmet, and that the market needs to adjust for higher yields,” said Sandeep Bagla, associate director, Trust Capital.
“Globally, yields are going up amid unwinding of monetary largesse. India cannot remain immune to it,” said Anindya Banerjee, currency and interest rate analyst at Kotak Securities. “The one-year derivative market (OIS) is probably factoring that amid a slew of other concerns.”
